Tuesday, 16 November 2010

Retention

Rudi Klein would be delighted to explain why retention is an out of date method of providing some security to the buyer. I still see retention included in many contracts. So, whilst I concur with Rudi, we still need to advise those using retention to make sure they are familiar with some unique provisions of (most) NEC3 contracts and how they deal with retention.

Considering the NEC3 Engineering and Construction Contract (ECC), secondary Option X16 provides for retention. So, point to note is that retention is not automatically included in the contract unless expressly stated in Contract Data part one (1st bullet). The second point is that the % figure to be held is determined by the buyer (the Employer in ECC) who states this at time of tender. Half of the retention held is released upon Completion of the whole of the works and the remainder upon the defects date. This is similar to most standard form contracts.

One difference is that Completion of any sections of the works does not result in a reduction or paying back of retention, this is linked to Completion of the whole of the works. The main feature I wanted to point out here is the retention free amount. If you think about it, on say a 2 year contract, why do we take retention each month from the Contractor when really we only want security at the back end of the contract to provide a stick to get the Contractor back to correct Defects? Who pays for the financing of such monies held? The buyer of course. Is this good value? Probably not. So, a key differentiator with retention on NEC3 contracts is that you can specify a retention free amount whereby retention is only held after the retention free amount is reached. This eases the Contractor's cash flow burden, must reduce the financing charges and therefore the price payable.

So, if one absolutely must have retention, then think both about the retention % but more importantly how much retention free amount can properly be included.

Any thoughts?

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